How to Calculate F&O Turnover

The derivatives segment in India, comprising futures and options (F&O) contracts, is quickly gaining momentum. Over the past few years, trading volumes in the segment have skyrocketed. 

If you, like many others, plan to trade in futures and options, knowing how to calculate F&O turnover is crucial. This is because, unlike the spot segment, there are certain turnover limits for F&O transactions, which when exceeded, have some major implications. 

In this article, we are going to explore what F&O turnover is, the formula used for turnover calculation in the F&O segment and the implications of exceeding the limits. Let’s begin. 

What is F&O Turnover? 

F&O turnover is the term used to refer to the absolute profit or loss arising from trading futures and options contracts on an exchange. The turnover is usually calculated for a financial year. However, it can also be calculated for a specific day or a particular time frame. 

F&O turnover is an important metric, especially if you are an active derivatives trader. Knowing your F&O turnover for a financial year is crucial to determining whether the tax audit provisions under Section 44AB of the Income Tax Act, 1961, apply to you or not.   

What is Section 44AB of the Income Tax Act, 1961 and How is it Related to F&O Turnovers? 

Section 44AB of the Income Tax Act, 1961 states that all traders with F&O turnovers within or exceeding the specified limits must mandatorily get themselves tax audited. Here is a closer look at the turnover limits imposed by the Income Tax Act.

• F&O Turnover of less than Rs. 2 Crore

A tax audit will be applicable if your total futures and options trading turnover is below Rs. 2 crore in a financial year and your total profit or loss is less than 6% of the turnover. However, this is only if you have not opted for the presumptive taxation scheme during any of the previous five financial years and if your total income exceeds the income tax basic exemption limit.  

If your total futures and options trading turnover is below Rs. 2 crore in a financial year and your total profit or loss is more than 6% of the turnover, a tax audit will not be applicable.  

• F&O Turnover Between Rs. 2 Crore and Rs. 10 Crore

A tax audit is not required if your total futures and options trading turnover ranges between Rs. 2 crore and Rs. 10 crore during a financial year. However, this is only possible if the majority (more than 95%) of F&O transactions are executed electronically.  

• F&O Turnover Exceeding Rs. 10 Crore

A tax audit is mandatory irrespective of whether you make a profit or a loss if your total futures and options trading turnover exceeds Rs. 10 crore during a financial year.

How to Calculate F&O Turnover? 

Now that you know what F&O turnover is and what it would mean if you exceeded the limits specified under Section 44AB of the Income Tax Act, 1961, let us look at how turnover calculation in the F&O segment is done. 

• Futures Turnover Calculation 

The following formula is used to calculate the turnover of futures contracts.

Futures turnover = Sum of all profits and losses arising from futures trades made during a particular period

• Options Turnover Calculation

The following formula is used to calculate the turnover of option contracts during a financial year.

Options turnover = Sum of all profits and losses arising from options trades made during a particular period + All of the premium received from selling options contracts

Turnover Calculation in F&O: An Example

Here is a hypothetical example to help you understand how the F&O turnover calculation is done. 

Assume you are a derivatives trader who routinely trades in both futures and options contracts. At the end of the financial year 2023-2024, your futures and options trades, along with their respective profits and losses, are as follows.  

Futures Turnover Calculation:

Options Turnover Calculation:

Now, your total futures and options turnover for the financial year 2023-2024 would be Rs. 10,88,300 (Rs. 6,86,000 + Rs. 4,02,300). Assuming that you have not opted for the presumptive income tax scheme, you will not be liable for a tax audit for this financial year. This is because your total F&O turnover is below Rs. 2 crore and the total profits from the derivative trades are more than 6% (85%) of your total turnover.  

Why is Knowing How to Calculate Your F&O Turnover Important? 

Tax compliance is the most important reason why every derivatives trader must know how to calculate F&O turnover. Income from trading in derivative contracts is classified under the heading ‘Profits and Gains From Business or Profession’ under the Income Tax Act, 1961. 

Being aware of how turnover calculation in the F&O segment is done can help traders accurately estimate the income from their trading activities, which is crucial for determining their tax liability. Furthermore, it also helps in determining whether a tax audit applies to them or not. 

Conclusion 

With this, you must now be aware of how to calculate F&O turnover. Fortunately, most trading platforms in India provide details of your derivative trades, including the turnover for the desired period, eliminating the need to calculate it manually. 

If you are planning on trading derivatives, another major factor you need to be aware of is the F&O margin. Since derivative contracts are leveraged products, you need to deposit a margin to trade in them. As a trader, being aware of what the F&O margin for a particular derivative trade is before you initiate a position is crucial since it can help you make informed decisions. This is where an F&O margin calculator can come in handy. It is an online tool that can give you an estimate of the margin you need to deposit for a derivative trade.

The Research 360 platform, powered by Motilal Oswal, offers a host of features designed to make derivatives trading easier. On the platform, you can find open interest data for stocks and other assets, option chains for various contracts, Market-Wide Position Limits (MWPL) and derivative contract rollover data, among others. Additionally, you can also construct various simple and complex option strategies on the platform with just a few clicks. So, sign up for Research 360 today and enjoy the gamut of derivative-focused features.